Overview of India's Insurace Sector

Insurance in India used to be tightly regulated and monopolised by state-run insurers. Following

the move towards economic reform in the early 1990s, various plans to revamp the sector finally

resulted in the passage of the Insurance Regulatory and Development Authority (IRDA) Act of 1999.

Significantly, the insurance business was opened on two fronts. Firstly, domestic private-sector

companies were permitted to enter both life and non-life insurance business. Secondly, foreign

companies were allowed to participate, albeit with a cap on shareholding at 26%. With the

introduction of the 1999 IRDA Act, the insurance sector joined a set of other economic sectors on

the growth march.

During the 2003 financial year1, life insurance premiums increased by an estimated 12.3% in real

terms to INR 650 billion (USD 14 billion) while non-life insurance premiums rose 12.2% to

INR 178 billion (USD 3.8 billion). The strong growth in 2003 did not come in isolation. Growth in

insurance premiums has been averaging at 11.3% in real terms over the last decade.

Insurance development and potential

Notwithstanding the rapid growth of the sector over the last decade, insurance in India remains at an

early stage of development. At the end of 2003, the Indian insurance market (in terms of premium

volume) was the 19th largest in the world, only slightly bigger than that of Denmark and comparable

to that of Ireland.2 This was despite India being the second most populous country in the world as

well as the 12th largest economy. Yet, there are strong arguments in favour of sustained rapid

insurance business growth in the coming years, including India’s robust economic growth prospects

and the nation’s high savings rates.3

The dynamic growth of insurance buying is partly affected by the (changing) income elasticity of

insurance demand. It has been shown that insurance penetration and per capita income have a

strong non-linear relationship.4 Based on this relation and other...